Homeowners Rise Above Water on Mortgages

Fewer U.S. homeowners owe more on their mortgages than their homes are currently worth, according to a new report from online real estate company Zillow. Nearly two million came out from underwater in 2012, and Zillow analysts estimate another one million more will see positive home equity in 2013. That sounds like a lot, but an estimated 13.8 million borrowers are still lacking any home equity, or 27.5 percent of all homeowners with a mortgage.

"Freed from negative equity, homeowners will have more flexibility, and some will likely choose to list their home for sale, helping to ease inventory constraints and moderating sometimes dramatic, demand-driven price increases in some markets," said Zillow Chief Economist Dr. Stan Humphries. "But negative equity is still very high, and millions of homeowners have a very long way to go to get back above water, even with current robust levels of home value appreciation in most areas. As a result, negative equity will remain a major factor in the market for the foreseeable future."

Still millions more are in a "near-negative equity" position, with less than five percent home equity. That makes it impossible for them to sell without having to pay various fees out of pocket. It also gives them nothing to put down on another home.

Zillow is not the only entity predicting negative equity moves, and the estimates vary widely. That is because it is difficult to know the exact reason any borrower comes above water. Much of it is home price appreciation, but some borrowers are also paying into their loans to get better refinance rate, while thousands are getting principal write-down, thanks to the $25 billion mortgage servicing settlement signed early last year.

In fact, 70,810 borrowers so far have received a collective $7.409 billion in loan principal forgiveness, averaging approximately $104,626 per borrower, according to a report released Thursday by the settlement's monitor. 25,000 more borrowers are in trial modifications with nearly $3.5 billion in principal forgiveness. That is $11 billion toward positive equity. Of course American homeowners with a mortgage are still collectively underwater by more than $1 trillion, according to Zillow.

The negative equity numbers also don't say anything about whether or not the loans coming out from underwater are delinquent. While the overall delinquency rate dropped dramatically in the fourth quarter of 2012 to 7.09 percent of all loans, according to a survey released Thursday by the Mortgage Bankers Association, nearly 11 percent of all U.S. mortgages are either delinquent or in the foreclosure process.

"One cautionary note is that the 90 day delinquency rate increased by 8 basis points, reversing a fairly steady pattern of decline and the largest increase in this rate in three years," notes the MBA's chief economist Jay Brinkmann.

These so-called "seriously delinquent" loans are being processed more quickly now that new foreclosure rules are in place and will therefore be sold back to banks or investors in the next few months. Those sales would therefore be shown as loans coming out from underwater because they would cease to exist.

Another important factor in looking at negative equity, as with everything else in real estate, is location:

"Among the nation's 30 largest metro areas, those with the highest number of homeowners freed from negative equity last year were Phoenix (135,099 homeowners freed in 2012); Los Angeles (72,936 homeowners freed in 2012); Miami-Fort Lauderdale (70,484 homeowners freed in 2012); Dallas-Fort Worth (59,461 homeowners freed in 2012); and Riverside, Calif. (58,417 homeowners freed in 2012)," notes the Zillow report.

The highest volume of underwater borrowers were in the most distressed states, where the foreclosure rates are high and where investors are pursuing short sales fervently. It is therefore incorrect to make the assumption that all of the "newly freed" borrowers are either still in their homes with newfound equity or sold at any kind of profit. Of course this also means that negative equity may cure faster than anticipated, since it is so highly concentrated in certain hot investor markets.

The return of home equity is good news for the greater economy, as it makes borrowers feel better about their own personal wealth and therefore more apt to spend. It could also prompt more borrowers to sell their homes. Unfortunately that will not do much to ease the severe inventory shortage of homes for sale, as most sellers will be buyers as well. There are currently just 1.74 million homes for sale, the lowest since December of 1999.